China starts to quietly kick currency goals in world trade

Despite the lingering effects of the trade bans and problems between Australia and China, the Middle Kingdom remains front and centre in Australia’s economic fortunes.

You only have to look no further than the resurgence in the price of iron ore to see that Australia is a big beneficiary of Chinese demand, despite its sluggish recent economic performance and serious problems in the Chinese property sector.

While many equate demand for Australian iron ore solely to the building sector in China, it is worth noting that China also makes and uses a lot of steel for its export industries.

China now exporting lots of ‘Aussie’ steel

That is a big deal now that China exports more cars than any other country and is surfing the transition to electric cars and many other exports that use steel with great success.

Another sign of the importance of China in the world economy despite the lingering effect of its prolonged Covid shutdowns in slowing its domestic economy is the growing use of the yuan in world trade.

While China is a long way behind the absolute dominance of the US dollar which accounts for about 47% of world trade.

In comparison, China is tiny with just 3.6 % of world trade deals in October last year but after years of campaigning that is starting to grow quite quickly – up from just 1.9% in January last year.

It is now becoming apparent that the more than 30 bilateral currency swap lines that China has established with other central banks are starting to get used, with the Yuan now employed more often outside China’s borders.

Chinese banks are also lending overseas in their local currency, which can be quite attractive for borrowers because of high US interest rates and also weakness in the Yuan.

There is also still a lot of official encouragement of internationalising the Yuan from President Xi, so the rapid increase of the yuan in international trade could continue to make small but significant inroads and assist in the internationalisation of China’s currency.

Ukraine war helping to push the Yuan

Another factor increasing the use of the Yuan is Russia’s war in Ukraine and some western sanctions, with Russian oil suppliers and other exporters now asking for payment in Chinese currency.

China is also working to free up the usage of the Yuan with pilot schemes to allow foreign multinationals that operate in China to integrate local and foreign-currency cash pools and transfer them between their domestic and overseas subsidiaries without prior approvals.

If successful, these pilot schemes could lead to lower hedging costs and better risk management for the multinational companies and continue to increase the use of the Yuan internationally, which has been problematic given the usual tight and clunky capital controls used within China.

It is going to be a long and slow process but as well all know, China can be a very patient country when it needs to be and it would not be a big surprise to see the Yuan continue to account for a greater volume of world trade every year.

It seems inconceivable that China could one day match the sort of trade dominance enjoyed by the deep and liquid capital and forex pools coming out of the US but over time China has shown in many fields that it can eventually become a contender.